Singapore banks to see loan growth rate halved this year from coronavirus: Fitch Solutions

[SINGAPORE] Singapore banks' loan growth will slow to 1.5 per cent in 2020, down from 3.1 per cent last year, given the stiff economic headwinds facing Singapore from the coronavirus (Covid-19) outbreak, Fitch Solutions Macro Research forecast in a report released on Friday.

The likelihood of a more pronounced slowdown is likely to weigh on credit demand, with businesses across a broad range of sectors including retail, tourism and the export-oriented manufacturing sector, likely to encounter tougher conditions as a result of the coronavirus epidemic around the world, said the research firm. It nopted that Singapore banks have already been contending with a contraction in consumer loan growth.

Furthermore, likely monetary easing from the Monetary Authority of Singapore (MAS) would prevent interest rates from falling too far to offset lower credit demand, it said.

Fitch Solutions said that while interest rates would normally fall in order to adjust to lower credit demand, Singapore is likely to undergo monetary easing in 2020 in a bid to support the economy, especially the exporting sectors, limiting the extent to which this is possible.

Unlike other countries which use interest rates as the policy lever, Singapore uses the exchange rate instead. Easing monetary policy under such a system tends instead to have an upward effect on interest rates as they would adjust to maintain the attractiveness of assets denominated in the Singapore dollar, all other things equal.

Therefore, as the Singapore Interbank Offered Rate (Sibor) rises in tandem with a weaker Singapore dollar, banks will find it hard to lower their rates significantly to bolster credit demand, further weighing on loan growth. Sibor is a key benchmark rate to price most home loans here.

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Fitch Solutions observed that loan growth last year was due to a recovery in lending to businesses that began in April 2019, in line with Singapore's stronger economic performance towards the latter half of 2019. But consumer loans (around 40 per cent of total loans) remained in contraction last year, mostly a reflection of the cooling property market and by extension, slower mortgage growth.

However, the recovery in business loans (around 60 per cent of all loans) is unlikely to be sustainable in 2020 given that Singapore's open economy is heavily exposed to the likely deeper slowdown in the Chinese economy from the Covid-19 outbreak, said Fitch Solutions. It has revised down China's 2020 real GDP growth to 5.6 per cent from 5.9 per cent.

"As a result, our current 2020 real GDP growth forecast of 1.7 per cent for Singapore is exposed to heavy downside risks, and we will revisiting this figure over the coming weeks," said the firm.

The report also noted that Singapore's export-oriented manufacturing sector is closely tied to those of China's economy and that the outbreak will hit a sector already weakened by the ongoing US-China trade war and the slowdown in China. Singapore's non-oil domestic exports posted 12 straight months of contraction at an average pace of 10.8 per cent year on year between December 2018 and November 2019, it calculated.

It also said the tourism and related hospitality and retail sectors in Singapore will take a hit, not just from the plunge in Chinese visitors, who make up 18.5 per cent of arrivals here, but also as the climbing infection toll in Singapore and the Orange outbreak response level likely deters visitors from other countries as well.

Fitch Solutions is part of the Fitch Group, which also comprises credit rating agency Fitch Ratings.

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